RBA turns blind eye to housing boom

If house prices keep ballooning at their present pace, Australia’s residential property sector will be more expensive relative to incomes than at any previous point over the past 40 years.
Photo: Arsineh Houspian

But the good news for borrowers and speculators on long shares and housing is the RBA has no intention of hiking rates any time soon. And the RBA claims that it’s not disconcerted by developments in Australia’s booming housing market, which has recorded double-digit gains for over a year and is characterised by near-record leverage.

The RBA would like to see the Aussie dollar well below US90¢ – in the governor’s words, “nearer US85¢" – to ensure the monetary policy mix between the currency and rates is appropriate for the economy’s outlook.

The level of the exchange rate is therefore central to the future direction of rates. If traders keep pushing up the Australian dollar, which will automatically tighten financial conditions, the RBA will have little choice but to drop its neutral bias and bring the prospect of cuts back to the table.

AFR
AFR

After highlighting a 12 per cent fall in the currency since May, the Statement on Monetary Policy published by the RBA on Friday emphasised that “if sustained, lower levels of the exchange rate will assist in achieving balanced growth". The words to focus on here are “if sustained" – which is a precondition to the RBA’s neutral stance.

Just so that we’re clear: when the RBA observes that “a period of stability in the policy rate is likely", that categorically does not give financial markets “forward rate guidance", as some of its peers, like the Bank of England, have elected to do in the past.

In contrast to the RBA’s bewilderment at currency traders’ behaviour, it thinks the bond market reaction to Tuesday’s policy change was about right. Here the Statement on Monetary Policy pointedly highlights that “market pricing suggests no change to the cash rate is expected for about a year".

The RBA suspects there is every chance the “surprisingly" elevated core inflation registered in December, which printed at 0.9 per cent over the quarter, was a rogue number that will not be succeeded by similarly worrying outcomes.

Related Quotes

Company Profile

‘Random noise in the data’

The RBA was looking for a 0.6 per cent result in the December quarter and does not think the December data gel with Australia’s weak labour market and low wages growth, which should put downward pressure on domestic costs.

It suggests that “it is equally possible the [December] quarterly out-turn reflects a degree of random noise in the data". A similar experience occurred in 2006 when modest core inflation did not easily reconcile with a low jobless rate and strong growth.

One indication the RBA believes the current cash rate is well-calibrated to its best guess at future conditions is its forecasts for the core inflation rate.

While the RBA has core inflation creeping to the top end of its target 2 per cent to 3 per cent band in the next few quarters, it posits that this will be a one-off move attributable to currency decline. Holding the cash rate and exchange rate constant, the RBA’s sanguine base-case is that core inflation will drop back to the mid-point of its target by late 2015.

A game-changer would be a second high core inflation number in the March quarter. This would discredit the RBA’s benign narrative and likely precipitate tighter policy.

In the interests of not spooking traders, the RBA is clinging to its stubbornly optimistic view of Australia’s frothy housing market. Instead of noting that Australia’s 133.6 per cent housing debt-to-income ratio is a bee’s appendage away from the 134.2 peak recorded in mid 2010, the RBA simply says this ratio is “little changed".

Double-digit inflation in housing costs, which is running at more than three times wages growth, is recast as “broadly consistent with the historical relationship between interest rates and housing prices". That is: nothing to fret about right now.

Yet if house prices keep ballooning at their present pace, Australia’s residential property sector will be more expensive relative to incomes than at any previous point over the last 40 years. The bottom line is that I do not share the RBA’s confidence on housing or inflation in the period ahead.